Captive insurance is an alternative risk financing technique in which a parent group or groups create a licensed insurance company to provide coverage for itself.  Organizations form their own captive for a number of reasons.  Significant risk, access to coverage not otherwise available or unaffordable and lowering the total cost of risk are three common factors that lead business owners, CEO’s, and CFO’s to explore the pro’s and con’s of captive insurance.

Is a captive right for you?

What is your risk tolerance?  Given the right circumstances, are you willing to self-insure?
What is your experience with traditional commercial insurance?  Does your organization face risk(s) that insurance is unavailable or unaffordable with traditional products?
What is your loss history? Historically do you pay more in insurance premiums than your carrier(s) pay in losses?
Are your annual insurance expenses greater than $500,000?


There are numerous benefits to forming a captive.  Following are a select few to consider:

  • Convert insurance premiums into financial assets
  • Reduce total Cost of Risk – Invest assets that back claim reserves until those assets are needed to pay for losses
  • Flexibility to retain or transfer risk
  • Potential tax benefits – tax deduction on premium expense paid by parent company to the captive.  Captive only pays tax on investment income.
  • Financing nontraditional risk which coverage is not widely available or affordable.
  • Improved claims handling & control of losses
  • Choice to administer own claims or hire a TPA
  • Selection of Legal Counsel and/or investigative services
  • Rate Equity – premium rates are based on your loss experience, not industry average
  • Cash Flow – invest underwriting income during time between receipt of premium and payment of losses
  • Direct access to reinsurance marketplace – ability to negotiate directly and utilize reinsurance resources (cat modeling, asset mgmt, regulatory assistance, investment strategy, fronting capabilities)


  • Capital & Start-up costs
  • Operating costs
  • Potential for Adverse Loss Experience
  • Difficulty winding down

Other Considerations

Forming and managing a captive can be a complex undertaking and isn’t a good fit for all companies.  However, if properly planned and the steps to forming a captive are paid with close attention, it can provide significant tax and non-tax advantages to it’s shareholders.  Following are some other considerations when forming a captive:

  • Specific reason for forming a captive
  • Type of captive – single-cell, group, association, rent-a-captive, structured cell to name a few)
  • Domicile – availability of resources, start-up costs, taxes, regulatory oversight, collateral requirements, continuing costs, regulatory climate, legislation
  • On or offshore benefits
  • Types of risk – property, liability, nontraditional
  • Risk severity and probability
  • Risk retention strategy
  • Credit rating

If you would like to learn more about captive insurance and determine if forming a captive is right for your organization, give us a call.